Stocks Extend Recent Gains

Charles Schwab: On the Market

Posted: 12/8/2017 4:15 PM EST

Stocks Extend Recent Gains

 

U.S. stocks advanced during the regular trading session to extend recent gains and finish the week mostly higher. The advance for equities was aided by a relatively upbeat read on the domestic labor market which followed favorable economic reports out of China and Japan. Treasury yields were mixed and the U.S. dollar was higher, while gold was little changed and crude oil prices rallied. 

The Dow Jones Industrial Average (DJIA) increased 119 points (0.5%) to 24,329, the S&P 500 Index was 15 points (0.6%) higher at 2,651, and the Nasdaq Composite advanced 27 points (0.4%) to 6,840. In moderate volume, 740 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.67 to $57.36 per barrel and wholesale gasoline gained $0.02 to $1.72 per gallon. Elsewhere, the Bloomberg gold spot price moved $0.71 higher to $1,247.93 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 93.90. Markets were mixed for the week, as the DJIA and the S&P 500 Index increased 0.4% and the Nasdaq Composite declined 0.1%.

United Continental Holdings Inc. (UAL $64) increased its Q4 passenger revenue outlook after reporting a 5.1% increase in November traffic, and it announced a new $3 billion share repurchase program. Shares traded higher.

Western Digital Corp. (WDC $81) is gained solid ground amid media reports that the company and Toshiba Corp. (TOSYY $16) have reached a deal in principle to settle their chip dispute and could announce a formal agreement next week. Neither company commented on the report.

Cooper Companies Inc. (COO $227) reported fiscal Q4 earnings-per-share (EPS) of $1.78, or $2.65 ex-items, versus the $2.64 FactSet estimate, with revenues rising 8.0% year-over-year (y/y) to $562 million, above the projected $559 million. The medical device company issued 2018 EPS guidance that had a midpoint below expectations. Shares finished solidly lower.

November labor report shows job growth tops forecasts, consumer sentiment slips

Nonfarm payrolls (chart) rose by 228,000 jobs month-over-month (m/m) in November, compared to the Bloomberg forecast of a 195,000 increase. The rise of 261,000 seen in October was revised to a gain of 244,000 jobs. The total upward revision to the job gains in October and September was 3,000.

Excluding government hiring and firing, private sector payrolls increased by 221,000, versus the forecasted gain of 195,000, after rising by 247,000 in October, revised from the 252,000 increase that was initially reported. The Department of Labor said employment continued to trend up in professional and business services, manufacturing and healthcare.

The unemployment rate remained at 4.1%, matching estimates, while average hourly earnings were up 0.2% m/m, below projections of a 0.3% increase and versus October's downwardly revised 0.1% decrease. Y/Y, wage gains were 2.5% higher, versus estimates of a 2.7% increase and October's downwardly revised 2.3% rise. Finally, average weekly hours ticked higher to 34.5 from October's unrevised 34.4 rate, where it was forecasted to remain.

Rate hike expectations for when the Fed concludes its meeting next week remained elevated following the relatively favorable employment report but the softer-than-expected wage growth and downward revision to the prior month may have caused some uncertainty regarding the pace of rate hikes in 2018. As we head toward the New Year, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers a look at the key issues to watch in his latest, Schwab Sector Views: 18 Thoughts Heading into '18, pointing out that business optimism is elevated, which could bolster already rising capital investments. This could help support a continuation of the strong labor market.
Schwab's Chief Investment Strategist Liz Ann Sonders points out that capital spending (capex) is likely to be an economic highlight in 2018 and coupled with the continued rebound in productivity is good news for wages in her articles, Takin Care of Business: Several Important Kickers for a Strong Capex Cycle and One Thing Leads to Another: Productivity's Rebound.

The preliminary University of Michigan Consumer Sentiment Index (chart) declined to 96.8 in December, from 98.5 in November, and compared to expectations of an improvement to 99.0. The current economic conditions component of the survey improved but was more than offset by a decline in the expectations part of the report. The 1-year inflation forecast rose to 2.8% from November's 2.5% rate, while the 5-10 year inflation outlook ticked higher to 2.5% from the prior month's level of 2.4%.

Wholesale inventories (chart) were revised lower to a 0.5% m/m decline for October from the preliminary estimate of a 0.4% decrease, where it was forecasted to remain and compared to September's 0.1% gain. Sales grew 0.7% m/m, compared to forecasts of a 0.3% increase and September's upwardly revised 1.4% rise. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—dipped to a 1.25 months pace from September's 1.26 rate.

Treasuries finished mixed, with the yield on the 2-year note dipping 1 basis point (bp) to 1.79%, the yield on the 10-year note remaining at 2.37%, and the 30-year bond rate increasing 1 bp to 2.76%.

The U.S. dollar is extended its weekly gain and Treasury yields are diverged on the heels of the employment data, which followed favorable Chinese trade and Japanese GDP figures. Moreover, the markets cheered a breakthrough in the U.K. Brexit impasse, and a short-term government funding bill late yesterday that should help avoid a U.S. government shutdown this weekend. However, tax reform continues to be a main focus for the markets as the House and Senate grapple with reconciling key differences in their bills.

Schwab's Director of Tax and Financial Planning, Hayden Adams, CPA, offers analysis of the reconciliation process and what investors should be paying attention to, in his article, Tax Reform: What Investors Should Know.

If you have questions regarding how the potential tax overhaul may affect you as an investor, see Hayden's Tax Reform: Frequently Asked Questions.

Europe and Asia higher

European equity markets moved higher, with the markets cheering upbeat economic reports out of the U.S., China and Japan, which overshadowed an unexpected drop in German exports and mixed industrial and manufacturing production figures in the region. Financials led the way, bolstered by a long-awaited deal by regulators to complete the final batch of post-crisis capital rules, which offered clarity for the industry. The U.K. and European Union (EU) reached a deal on three key issues, including the Irish border, that paves the way to break the Brexit negotiation deadlock and likely leads to talks moving to the next phase ahead of next week's EU summit. However, the next stage would revolve around trade and headlines suggested this could be a lengthy process in getting an agreement, which appeared to weigh on the British pound versus the U.S. dollar. The Brexit breakthrough joined the agreement in the U.S. on a short-term government spending bill that likely avoids a near-term shutdown, though the markets continued to eye the U.S. tax reform reconciliation process.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives Randy Frederick point out in the video, Political Risk: How Should Investors Respond?, that a long history of these developments shows us that holding a well-diversified portfolio may buffer the short-term market moves that are often the result. So, investors should avoid overreacting to the political and geopolitical drama and stick to their long-term financial plans. The euro dipped versus the greenback and bond yields in the region finished mixed.

Stocks in Asia finished higher as the U.S. markets rose to break a string of sluggishness, while economic reports in the region fostered some optimism. Japan's Q3 GDP was revised to a 2.5% quarter-over-quarter annualized pace of growth, from the preliminary estimate of a 1.4% rise, and versus expectations of an adjustment to a 1.5% rate of expansion. China's November exports and imports rose much more than expected resulting in an unexpected widening of the nation's trade surplus. The yen lost ground for a second day amid some rejuvenated global economic optimism, helping lift Japanese share prices. Stocks trading in mainland China and Hong Kong advanced, while securities trading in Australia and India also gained ground and South Korean equities ticked to the upside. The markets rebounded after a recent stumble and Schwab's Jeffrey Kleintop, CFA, and Randy Frederick, discuss in the video, It's All Relative: Why Stocks May Not Be Overvalued.

Stocks nudge higher on week as tech rebounds and tax reform moves closer

U.S. stocks finished the week modestly higher with economic data continuing to paint a positive global backdrop, while the weekend passage of the Senate's tax reform bill fostered optimism that the most sweeping overhaul effort in decades was moving closer to President Donald Trump's desk. Moreover, the tech sector rollover that had pressured the markets as of late, reversed to the upside as the week matured to help nudge the markets into positive territory and the Nasdaq mostly recover early losses. Energy stocks lagged behind as crude oil prices moved to the downside. The U.S. dollar moved noticeably higher and Treasury yields ticked to the upside in choppy trading with political uncertainty in Europe also garnering attention.

Next week, fiscal policy focus will share the spotlight with monetary policy as the Federal Open Market Committee (FOMC) is highly expected to conclude its Wednesday meeting with a 25 bps increase to its target fed funds rate to 1.50% (economic calendar). However, the accompanying updated FOMC projections and Chairwoman Janet Yellen's final press conference shortly after the decision will likely garner the most attention as the markets try to gauge the pace of rate hikes in 2018. The decision will also be joined by releases next week including: JOLTS Job Openings report, the NFIB Small Business Optimism Index, the Consumer Price Index (CPI), the Producer Price Index (PPI), retail sales, Markit's business activity reports, and industrial production and capacity utilization.

As noted in the latest Schwab Market Perspective: The Big Picture Heading into 2018, a better-than-expected 2017 appears to be morphing into a solid start to 2018, but it is unlikely to be as smooth a ride. We believe the bull market still has room to run but it could shape up to be a bumpier ride as expectations and sentiment are elevated. U.S. economic growth appears to be picking up, but with the Federal Reserve tightening policy and inflation likely to heat up, we appear to be in the latter stages of the cycle. Global markets are also poised to have an unprecedented year of performance; which is unlikely to be repeated, but conditions around the world still look largely supportive of further gains.

International reports due out next week to look out for include: Australia—employment change. China—CPI and PPI, lending statistics, retail sales, and industrial production. India—CPI, industrial production, and trade balance. Japan—machine orders, industrial production and capacity utilization, and the Q4 Tankan Large Manufacturing Index. Eurozone—European Central Bank monetary policy decision, industrial production, Markit's business activity reports, and the trade balance, along with German investor sentiment and CPI. U.K.—the Bank of England monetary policy decision, CPI, employment change, and retail sales.

Stocks Close Trading Day and Week Higher

Charles Schwab: On the Market

Posted: 11/3/2017 4:15 PM EDT

Stocks Close Trading Day and Week Higher

 

U.S. stocks overcame some early weakness to finish the regular trading session higher as gains were led by the tech sector in the wake of Dow member Apple's earnings results and guidance. Also, services sector growth unexpectedly jumped to a more than 12-year high to overshadow the October labor report, which showed fewer jobs were added than expected and a lack of monthly wage growth. Treasury yields were little changed and the dollar rose. Crude oil prices were higher and gold traded lower. 

The Dow Jones Industrial Average (DJIA) rose 23 points (0.1%) to 23,539, the S&P 500 Index advanced 8 points (0.3%) to 2,588, and the Nasdaq Composite increased 49 points (0.7%) to 6,764. In moderately heavy volume, 813 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil gained $1.10 to $55.64 per barrel and wholesale gasoline added $0.02 to $1.79 per gallon. Elsewhere, the Bloomberg gold spot price shed $6.04 to $1,270.09 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 94.92. Markets were higher for the week, as the DJIA increased 0.5%, the S&P 500 Index gained 0.3% and the Nasdaq Composite advanced 0.9%.

Dow member Apple Inc. (AAPL $173) reported fiscal Q4 earnings-per-share (EPS) of $2.07, above the $1.87 FactSet estimate, as revenues grew 12.0% year-over-year (y/y) to $52.6 billion, exceeding the forecasted $50.7 billion. The company said it had record Q4 revenue with y/y growth for all its product categories and its best quarter ever for services. AAPL issued Q1 revenue guidance with a midpoint that was just ahead of expectations as it is "looking forward to a great holiday season," with its new products including iPhone 8, Apple Watch Series 3, and Apple TV 4K, along with the launch of iPhone X. Shares traded nicely higher.

Apple's earnings results were the latest from the heavyweights in the tech sector to exceed estimates, and Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers timely analysis of our outperform rating we have held for some time on the group in his latest, Schwab Sector Views: Technology Trick or Treat?. Brad notes that the technology sector’s strong run could continue, but risks for the sector have risen and investors should be careful not to get overly concentrated.

Starbucks Corp. (SBUX $56) posted fiscal Q4 EPS of $0.54, or $0.55 ex-items, compared to the projected $0.55, with revenues little changed y/y at $5.7 billion, below the expected $5.8 billion. Global same-store sales increased 2.0% y/y, missing the forecast calling for 3.3% growth. SBUX issued 2018 earnings guidance that came in below estimates. Separately, the company raised its quarterly dividend by 20% to $0.30 per share. Shares rose.

Pandora Media Inc. (P $5) announced a Q3 loss of $0.34 per share, or a $0.06 per share shortfall ex-items, versus the projected loss of $0.08 per share, as revenues rose 8.0% y/y to $379 million, south of the expected $380 million. The music streaming service company's advertising revenues were softer than expected and its users shrank solidly y/y. As such, P issued Q4 guidance that missed estimates and shares fell.

October labor report misses, services sector growth hits rare territory

Nonfarm payrolls (chart) rose by 261,000 jobs month-over-month (m/m) in October, compared to the Bloomberg forecast of an 313,000 increase. The decline of 33,000 seen in September was revised to a gain of 18,000 jobs. The total upward revision to the job gains in September and August was 90,000. Excluding government hiring and firing, private sector payrolls increased by 252,000, versus the forecasted gain of 302,000, after rising by 15,000 in September, revised from the 40,000 decrease that was initially reported. The report likely continued to reflect noise from the hurricanes, but employment at food services and drinking places recovered from September's drop, while employment rose in professional and business services, manufacturing and healthcare.

The unemployment rate dipped to 4.1% from 4.2%, where it was forecasted to remain, while average hourly earnings were flat m/m, below projections of a 0.2% increase and versus September's unrevised 0.5% increase. Y/Y, wage gains were 2.4%, versus estimates of a 2.7% increase and September's downwardly revised 2.8% rise. Finally, average weekly hours remained at September's unrevised 34.4 rate, matching forecasts.

Despite the disappointing wage growth figure, December Fed rate hike expectations remain elevated as this week's monetary policy decision reinforced the likelihood of an increase next month as discussed by Schwab's Chief Investment Strategist Liz Ann Sonders in her article, Fed Stands Pat in November; Gets Ready to Go in December. Liz Ann also notes that we expect two-to-three rate hikes in 2018, and the market's expectations may have to rise to meet the Fed's, representing a shift.
The trade balance (chart) showed that the deficit came in at $43.5 billion in September, compared to estimates of $43.2 billion. August's deficit was upwardly revised to $42.8 billion. Exports rose 1.1% m/m to $196.8 billion, while imports increased by 1.2% to $240.3 billion.

Factory orders (chart) rose 1.4% m/m in September, above expectations to match August's unrevised gain. Stripping out the volatile transportation component, orders advanced 0.7% and August's 0.4% rise was revised to a 0.6% gain. September durable goods orders—preliminarily reported last week to have grown 2.2%—were downwardly revised to a 2.0% increase, matching forecasts. Also, nondefense capital goods orders excluding aircraft, a gauge of business spending, were revised up to a 1.7% gain from the initially-reported 1.3% increase, posting the third-straight monthly rise of over 1.0%.

The October Institute for Supply Management (ISM) non-Manufacturing Index (chart) unexpectedly jumped to a level above 60 for only the fourth time in its history and the highest level since August 2005. The Index rose to 60.1from September's unrevised 59.8 level, and compared to forecasts of a decline to 58.5. A reading above 50 denotes expansion. New orders dipped m/m to 62.8, business activity rose to 62.2, and employment improved to 57.5. Prices fell but remained elevated at 62.7. Non-manufacturing activity accounts for a large majority of U.S. economic output and the ISM said respondents' comments continue to indicate a positive outlook for business conditions, and the economy as we begin the fourth quarter.

The final Markit U.S. Services PMI Index was revised to 55.3 in October from the preliminary 55.9 level, where it was expected to remain, and matching September's level. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.

Treasuries were little changed, with the yield on the 2-year flat at 1.61%, while the yields on the 10-year note and the 30-year bond declined 1 basis point to 2.33% and 2.81%, respectively.
Treasury yields and the U.S. dollar were relatively quiet as the markets grappled with data that bolstered the continued favorable global economic landscape, along with President Donald Trump's pick of Fed Governor Jay Powell as the next Fed Chairman. Also, tax reform uncertainty lingered in the wake of Thursday's release of the House's bill.

Schwab's Chief Fixed Income Strategist Kathy Jones and Vice President of Trading and Derivatives, Randy Frederick discuss in the video, Should a Change in Fed Leadership Matter to Investors?, while Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest commentary, House Tax Reform Bill: What Investors Need to Know.

Europe mixed and Asia mostly higher to close out the week 

European equity markets finished mixed, with technology issues getting a slight boost from Apple's favorable earnings report, while the markets digested the mixed U.S. nonfarm payroll report, which was countered by the jump in services sector activity. Yesterday's pick of a new Fed Chief by President Trump and the House's tax reform bill in the U.S. fostered some uncertainty. The British pound rebounded modestly from yesterday's drop that came courtesy of the Bank of England's rate hike that was accompanied by a dovish outlook for future increases. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers analysis of the changed global monetary policy landscape in his article, How the Shift by Central Banks May Affect the Stock Market. In economic news, Markit's U.K. business activity report for October showed growth in output unexpectedly jumped. The euro was down and bond yields in the region lost ground. Spanish stocks fell amid festering political tensions.

Stocks in Asia finished mostly to the upside as the markets grappled with Thursday's pick of a new Fed Chief by President Trump and details of the House's tax reform bill in the U.S. Technology issues got a boost from Apple's stronger-than-expected earnings and outlook. However, volume was lighter than usual as markets in Japan were closed for a holiday. Mainland Chinese shares declined and stocks trading in Hong Kong rose following Markit's services sector output report that showed growth accelerated in October, while concerns about regulatory crackdowns by the government and the recent selloff in the bond markets festered. Australian securities gained ground with mining issues seeing strength, while Indian listings advanced. South Korean stocks traded to the upside. Schwab's Liz Ann Sonders and Randy Frederick discuss the recent global market rally in the video, Tracking Sentiment: Are Investors Too Optimistic About Stocks?.

Stocks tilt toward the upside amid data and lingering uncertainties

The S&P 500 Index finished largely flat but skewed to the upside, and the Dow and Nasdaq posted their eighth-straight weekly gains, as earnings and economic data remained robust and mostly painted an upbeat picture. Personal spending, productivity, Consumer Confidence, and the ISM Manufacturing Index all showed solid growth leading into Friday's host of data. Earnings season rolled down the home stretch and remained on track to top expectations, with 67% of the 405 companies in the S&P 500 that have reported exceeding revenue forecasts and 77% besting earnings estimates, per data compiled by Bloomberg. However, momentum for stocks was likely stunted by lingering fiscal and monetary policy uncertainties. Along with the Fed's monetary policy decision that preserved December rate hike expectations, and a rate increase by the Bank of England, President Trump announced his pick for the next head of the Central Bank and the House's tax reform bill was highly scrutinized. Technology issues extended their rally as upside earnings surprises continued, headlined by Apple, while energy stocks led to the upside as crude oil prices extended a weekly string of gains. The telecom sector was the worst performer as earnings results have lagged to exacerbate ongoing concerns toward the group. Healthcare stocks also saw pressure in the wake of mixed results from Dow member Pfizer Inc. (PFE $35) and Aetna Inc. (AET $171), along with the heightened political trepidations. Amid the flood of events and data, the Treasury yield curve flattened and the U.S. dollar was little changed.

Next week, earnings season will continue to downshift and the economic calendar will be relatively light, with the JOLTS Job Openings report and the preliminary November University of Michigan Consumer Sentiment Index headlining the docket. However, fiscal and monetary policy grappling is poised to continue and possibly add some volatility for the markets.

As noted in the latest Schwab Market Perspective: Stocks Aren't so Spooky, global and domestic economic growth, along with a solid earnings picture and a potential tax reform tailwind, suggest investors should remain at their target equity allocations. Pullbacks are possible but a recession doesn’t appear to be in the cards in the near term, which historically has meant the risk of a pullback turning into a bear market is low.

International reports due out next week that deserve a mention include: Australia—Reserve Bank of Australia monetary policy decision. China—trade balance, CPI and PPI. India—industrial production. Japan—machine orders and trade balance. Eurozone—Markit's business activity reports, investor confidence and retail sales, along with German factory orders and trade balance. U.K.—industrial and manufacturing production, Markit's business activity reports and trade balance.

Stocks Mostly Flat, but Finish Week with Solid Gains

Charles Schwab: On the Market

Posted: 10/6/2017 4:15 PM EDT

Stocks Mostly Flat, but Finish Week with Solid Gains

U.S. equities closed the trading session nearly unchanged, holding onto solid weekly gains as the monthly labor report showed an unexpected drop in September job creation due to the recent hurricanes. Treasury yields modestly extended a fresh run amid bolstered December rate hike expectations, while the U.S. dollar reversed to the downside following rumors of a possible North Korean missile test this weekend. Crude oil was lower and gold advanced. In equity news, Costco and Yum China Holdings announced quarterly results. 

The Dow Jones Industrial Average (DJIA) decreased 2 points to 22,774, the S&P 500 Index dipped 3 points (0.1%) to 2,549, and the Nasdaq Composite ticked 5 points (0.1%) higher to 6,590. In moderate volume, 728 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil decreased $1.50 to $49.29 per barrel and wholesale gasoline was $0.05 lower at $1.56 per gallon. Elsewhere, the Bloomberg gold spot price added $6.86 to $1,275.08 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 93.81. Markets were nicely higher for the week, as the DJIA gained 1.7%, the S&P 500 Index added 1.2% and the Nasdaq Composite increased 1.5%.

Costco Wholesale Corp. (COST $157) reported fiscal Q4 earnings-per-share (EPS) of $2.08, above the $2.02 FactSet estimate, as revenues grew 15.8% year-over-year (y/y) to $42.3 billion, exceeding the $41.8 billion expectation. Q4 same-store sales rose 6.1% y/y, topping the forecasted 5.8% gain. However, the company's gross margin and membership renewal rates declined to disappoint the Street. Shares finished solidly lower.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: Consumer Staples: More than Meets the Eye, investors have grown nervous that already thin margins could collapse further as more shopping would potentially move online, and portions of the sector have taken a beating recently, which we think is a bit overdone. The staples group can be an important part of a portfolio, but without deteriorating economic conditions, a market weighting is the most we can justify. Read more on the Market Commentary page at www.schwab.com and follow us on Twitter: @schwabresearch.

Yum China Holdings Inc. (YUMC $41) posted Q3 EPS of $0.53, or $0.52 ex-items, versus the estimated $0.56, as revenues rose 8.0% y/y to $2.0 billion, roughly in line with forecasts. Q3 same-store sales grew 6.0% y/y, exceeding the 3.3% increase that was expected, reflecting solid growth at KFC and flat sales at Pizza Hut. The company approved an initial regular quarterly cash dividend of $0.10 per share, and increased its existing share repurchase program. YUMC traded higher.

September labor report shows wage growth may be gaining steam

Nonfarm payrolls (chart) declined by 33,000 jobs month-over-month (m/m) in September—the first decrease since September 2010—compared to the Bloomberg forecast of an 80,000 increase. The rise of 156,000 seen in August was revised to a gain of 169,000 jobs. The total downward revision to the job gains in August and July was 38,000. Excluding government hiring and firing, private sector payrolls decreased by 40,000, versus the forecasted gain of 75,000, after increasing by 164,000 in August, revised from the 165,000 rise that was initially reported.

The Labor Department noted that employment fell in food services and drinking places and showed below-trend growth in some other industries, likely reflecting major disruptions from hurricanes Harvey and Irma. Schwab's Chief Investment Strategist Liz Ann Sonders points out in her article, Trying to Reason with Hurricane Season: The Aftermath of "Harma", that a boost associated with the recovery/rebuilding efforts is likely. Read more on the Market Commentary page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

However, the unemployment rate fell to 4.2% from 4.4%, where it was forecasted to remain, with the Labor Department saying that there was no discernable effect of the hurricanes on the national unemployment rate. Average hourly earnings rose 0.5% m/m, above projections of a 0.3% increase and versus August's upwardly revised 0.2% increase. Y/Y, wage gains were 2.9%—the highest since 2009—versus estimates of a 2.6% increase, and versus August's upwardly 2.7% rise. Finally, average weekly hours remained at August's unrevised 34.4 rate, matching forecasts.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, points out in his article, Inflation May Be The Biggest Question For Investors In 2018, central banks are behaving as if wages and inflation will revive in the year ahead. If they don't, and central banks don't alter their policy path, the global stock markets could be in for a rough 2018. We expect central banks may get the big question of 2018 right, or at least mostly right, leading to gradually tighter monetary policy that doesn't derail the bull market or disrupt economic and earnings growth. But, there is a lot riding on it for investors and we will be watching the relationship between unemployment and wages closely. Read more on the Market Commentary page at www.schwab.com and follow Jeff on Twitter: @jeffreykleintop.

Wholesale inventories (chart) were revised slightly lower to a 0.9% m/m gain for August, versus forecasts calling for an unrevised preliminary 1.0% increase and July's 0.6% gain. Sales jumped 1.7% m/m, compared to forecasts to match July's upwardly revised flat reading. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—dipped to a 1.28 months pace from July's 1.29 rate.

Consumer credit, released in the final hour of trading, showed consumer borrowing expanded by $13.1 billion during August, below the $15.5 billion forecast of economists polled by Bloomberg, while July's figure was adjusted lower to an increase of $17.7 billion from the originally reported $18.5 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $7.3 billion y/y, while revolving debt, which includes credit cards, increased by $5.8 billion.

Treasuries dipped but finished off the worst levels of the day that initially followed the employment report, with the yields on the 2-year and 10-year notes, as well as the 30-year bond rate, rising 2 basis points (bps) to 1.51%, 2.37% & 2.91%, respectively.

Due to positive and widespread global economic growth, with signs of an uptick in inflation, elevated expectations of a December Fed rate hike and the confirmation that the Central Bank will begin this month to shrink is massive balance sheet, Treasury yields and the U.S. dollar have rebounded noticeably in the past month. The yield on the 10-year Treasury note has recovered from levels not seen since late-2016 and the greenback has bounced off multi-year lows, also bolstered by the recently released tax reform framework, which appeared to foster some fiscal policy optimism despite facing a long road. The stock markets remain resilient, posting fresh record highs this week.

Amid this backdrop, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his article, Tax Reform Framework Released, But The Road Ahead Is Long, and Schwab's Liz Ann Sonders discusses the stock market's resiliency in her article, Comfortably Numb? An Update on Investor Sentiment. Read these articles on the Market Commentary page at www.schwab.com.

Europe mostly lower, Asia advances to close out the week

European equity markets finished mostly lower, as the markets digested the noisy U.S. labor report and a sharp jump in German factory orders for August. Also, continued weakness in the British pound in the wake of the recent rally in the U.S. dollar and amid festering political uncertainty in the region may have buoyed the U.K. markets. The euro reversed to the upside as the U.S. gave up early labor-report-fueled gains and dipped on rumors of a potential missile test by North Korea over the weekend and amid elevated expectations the European Central Bank could begin to dial back stimulus measures. Spanish political uneasiness remained as Catalonia continues to fight for independence after this week's vote that national authorities have called illegal. U.K. political uncertainty also lingered in the wake of this week's speech by U.K. Prime minister Theresa May that was marred by some mishaps, while the Brexit negotiations appear to be getting complicated.

Meanwhile, U.S. rate hike expectations jumped on the employment report, while recent hawkish signals from the ECB and Bank of England added to the global monetary policy anxiety. Bond yields in the region mostly gained ground.

For analysis of political and Brexit uncertainties, see Schwab's Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, Randy Frederick's video, Political Risk: How Should Investors Respond?, and our article, Brexit Begins: What's Next for the U.K?, on the Insights & Ideas page at www.schwab.com. Follow Randy on Twitter: @randyafrederick. Uncertainty regarding who will be the Fed Chief in the U.S. is festering in the wake of the ECB and Bank of England signaling last month moves to tighten monetary policy. As such, Schwab's Jeffrey Kleintop, CFA, offers analysis in his article, How the Shift by Central Banks May Affect the Stock Market, on the Market Commentary page at www.schwab.com.

Stocks in Asia finished out the week in positive fashion, moving broadly higher on the heels of the continued record highs in the U.S., despite today's looming September labor report. However, volume remained lighter than usual, as mainland Chinese and South Korean markets remained closed for holidays. Japanese equities rose, with the yen extending recent weakness versus the U.S. dollar, while data showed wages rebounded slightly in August and Bloomberg pointed out that sentiment may have been supported by data showing foreigners turned to net buyers of Japanese equities last week for the first time since July. Shares trading in Hong Kong advanced, returning to action following yesterday's holiday break, while Indian stocks posted their first weekly gain in three. Australian securities gained ground, boosted by some dovish remarks by a Reserve Bank of Australia (RBA) member who said the RBA had not entirely ruled out further interest rate cuts in the wake of this week's disappointing retail sales figures and the central bank's unchanged monetary policy decision. Schwab's Jeffrey Kleintop, CFA, and Randy Frederick offer a look at global investing in the video, Is An Optimistic Outlook for Global Equities Warranted?, on the Insights & Ideas page at www.schwab.com.

Stocks begin Q4 in positive fashion

U.S. stocks began the final quarter of the year with a solid weekly gain and the U.S. dollar extended a recovery. Financials led the way as Treasury yields added to a recent rally that has taken the 10-year yield to highs not seen since July, with December rate hike expectations solidifying on a host of upbeat economic data. Leading up to Friday's labor report, a 13-year high in U.S. manufacturing activity followed upbeat reads out of China, Japan and eurozone, while growth in the key U.S. services sector was the strongest in 12 years. Both U.S. reports also showed inflation jumped.

Complementing the data, domestic business spending was stronger than initially-reported and September auto sales were mostly higher than projected. The House's passing of its budget resolution to start the long road to tax-reform bolstered fiscal policy optimism and most major sectors. However, crude oil prices fell decisively to give back a recent rally and pressure the energy sector.

Next week, the economic calendar will bring a plethora of releases that could drive volatility, headlined by the Producer Price Index (PPI) and Consumer Price Index (CPI), the minutes from the Fed's September meeting, retail sales and the preliminary October University of Michigan Consumer Sentiment Index. Other data next week to look out for include the NFIB Small Business Optimism Index and the JOLTS Job Openings report. However, the economic front will have to contend with the ramp up of Q3 earnings season, with the financial sector in focus as some banking heavyweights are slated to report.

As noted in the latest Schwab Market Perspective: Fourth Quarter Fun…or Folly?, the resiliency of stocks continues but risks of a pullback exist with signs of investor complacency and heightened political and geopolitical uncertainties. Earnings reporting season begins with elevated expectations and valuations, so the ability to hurdle the bar is getting tougher, but if surprises are biased to the upside, stocks should perform well. But that doesn't mean that there won’t be some Fed-induced volatility in the fourth quarter if inflation begins to kick in in earnest, it could push the Fed to be more aggressive than currently believed. Read more on the Market Commentary page at www.schwab.com.

International reports due out next week worth a mention include: Australia—consumer confidence. China—Caixin's PMI Services Index, trade balance and lending statistics. India—trade balance, CPI and industrial production. Japan—trade balance and core machine orders. Eurozone—investor confidence and industrial production, along with German trade balance and CPI. U.K.—industrial and manufacturing production and trade balance.

Please note: the U.S. bond markets will be closed on Monday in observance of the Columbus Day holiday.

Markets Notch Fourth-Straight Gain

Charles Schwab: On the Market

Posted: 9/1/2017 4:15 PM ET

Markets Notch Fourth-Straight Gain

U.S. equities finished the week out on a high note amid lighter volume ahead of the three-day Labor Day holiday weekend. The ISM Manufacturing Index jumped to a six-year high to aid the advance, while automakers posted relatively upbeat monthly sales reports, helping to overshadow a softer-than-expected August nonfarm payroll report. Treasury yields rose and the U.S. dollar continued to rebound, while crude oil prices were mixed and gold was higher.

The Dow Jones Industrial Average (DJIA) rose 39 points (0.2%) to 21,988, the S&P 500 Index added 4 points (0.2%) to 2,476, and the Nasdaq Composite gained 7 points (0.1%) to 6,435. In light-to-moderate volume, 651 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.06 higher to $47.29 per barrel and wholesale gasoline lost $0.03 to $1.75 per gallon. Elsewhere, the Bloomberg gold spot price gained $3.58 to $1,325.01 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 92.83. Markets were higher for the week, as the DJIA increased 0.8%, the S&P 500 Index jumped 1.3% and the Nasdaq Composite soared 2.7%.

Lululemon Athletica Inc. (LULU $62) reported Q2 earnings-per-share (EPS) of $0.36, or $0.39 ex-items, versus the $0.35 FactSet estimate, as revenues grew 13.0% year-over-year (y/y) to $581 million, north of the projected $567 million. Q2 same-store sales rose 7.0% y/y, topping the expected 4.2% gain. The yoga and athletic apparel company raised its full-year guidance. Shares rallied.

Palo Alto Networks Inc. (PANW $147) posted a fiscal Q4 loss of $0.42 per share, or EPS of $0.92 ex-items, compared to the projected $0.79, with revenues rising 27.0% y/y to $509 million, above the estimated $488 million. The cybersecurity company issued full-year guidance that was mostly above expectations. Shares jumped over 10%.

The major automakers reported August sales today, with General Motors Co's (GM $37) sales rising 7.5% y/y, compared to FactSet's projected 3.7% increase. Fiat Chrysler Automobiles NV's (FCAU $16) Chrysler sales dropped 11.0%, compared to the expected 5.3% decrease. Ford Motor Co. (F $11) reported a 2.1% decline in sales, versus the expected drop of 3.1%. Shares of all three automakers were nicely higher.

August job growth misses forecasts, but manufacturing growth jumps to six-year high

Nonfarm payrolls (chart) rose by 156,000 jobs month-over-month (m/m) in August, compared to the Bloomberg forecast of a 180,000 increase. The rise of 209,000 seen in July was revised to a gain of 189,000 jobs. The total downward revision to the job gains in July and June was 41,000. Excluding government hiring and firing, private sector payrolls increased by 165,000, versus the forecasted gain of 172,000, after increasing by 202,000 in July, revised from the 205,000 rise that was initially reported. Job gains occurred in manufacturing, construction, professional and technical services, healthcare and mining.

The unemployment rate ticked higher to 4.4% from 4.3%, where it was forecasted to remain, while average hourly earnings rose 0.1% m/m, below projections of a 0.2% increase and July's unrevised 0.3% increase. Y/Y, wage gains were 2.5%, versus estimates of a 2.6% rise, and matching July's pace. Finally, average weekly hours dipped to 34.4 from July's unrevised 34.5 rate, where it was expected to remain.

The Institute for Supply Management (ISM) Manufacturing Index (chart) for August jumped to the highest level since April 2011, after rising to 58.8 from 56.3 in July, compared to forecasts calling for an increase to 56.5. A reading above 50 denotes expansion. New orders and production were little changed, holding onto levels above 60, while employment jumped to the highest level since June 2011. New export orders declined 2.0 points to 55.5 and inventories rose 5.5 points to 55.5, while prices paid was flat at 62.0. ISM said comments from the survey reflect expanding business conditions.

The final Markit U.S. Manufacturing PMI Index was revised to 52.8 for August from the preliminary reading of 52.5, where it was expected to remain, but below the 53.3 level posted in July. A reading above 50 denotes expansion. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.

The final August University of Michigan Consumer Sentiment Index (chart) was revised lower to 96.8 from the preliminary level of 97.6, versus forecasts of 97.5. But the index is up solidly versus July's level of 93.4. Compared to last month, the expectations component of the report was higher, though the current conditions portion declined. The 1-year and 5-10 year inflation outlooks held at July's 2.6% and 2.5% rates, respectively.

Construction spending (chart) fell 0.6% m/m in July, versus projections of a 0.5% advance, and following June's downwardly revised 1.4% drop. Residential spending rose 0.8%, while non-residential spending fell 1.7%.

Despite being below expectations on most levels, today's jobs report—which is being discounted by economists due to seasonal factors—still suggests that the labor market is poised to continue to support economic prosperity. Also, the standout ISM Manufacturing Index, led by the jump in employment, likely bodes well for the broader economy as discussed by Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, in our article, Why the Industrial Sector Matters, on the Insights & Ideas page at www.schwab.com. Brad also discusses our outlook on all the major market sectors in his latest, Schwab Sector Views: Real Estate Roundup, on the Markets & Economy page. Follow us on Twitter: @schwabresearch.

Treasuries were lower following the plethora of data, as the yield on the 2-year note ticked 1 basis point (bp) higher to 1.33%, while the yields on the 10-year note and the 30-year bond rose 5 bps to 2.16% and 2.77%, respectively. Bond yields showed some relative signs of life after being quiet as of late, while the U.S. Dollar Index reversed to the upside, continuing to show signs of stabilization after recently hitting multi-year lows.

For our latest analysis of the political front, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's newest article, Congress Returns to Face Debt Ceiling, Government Shutdown Deadlines, on the Insights & Ideas page at www.schwab.com.

Schwab's Chief Fixed Income Strategist Kathy Jones offers a look at the bond markets in her article, What's the Bigger Risk: Bond Market Bubble or Complacency?, on the Fixed Income page at www.schwab.com, and for analysis of investing styles, see Schwab's Chief Investment Strategist Liz Ann Sonders' latest article, Radioactive II: Could the Tide Finally Be Turning for Active vs. Passive?, on the Markets & Economy page. Follow Kathy and Liz Ann on Twitter: @kathyjones and @lizannsonders.

Please note: All U.S. markets will be closed on Monday in observance of the Labor Day holiday.

Europe and Asia higher amid upbeat global manufacturing reports

European equities traded higher, as early strength in the euro relinquished following the upbeat U.S. manufacturing and auto sales reports, which accompanied favorable manufacturing reads in China, eurozone and U.K. The British pound remained higher versus the U.S. dollar but came off the best levels of the day. Bond yields in the region traded higher. The markets shrugged off the conclusion of the latest round of Brexit negotiations, with the European Union lead noting that talks failed to progress enough to move into a new phase set in October.

For a look at Brexit, see our article, Brexit Begins: What's Next for the U.K.? on the Insights & Ideas page. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA offers a look at a potential milestone for global profits in his latest article, Earnings may be about to do something they've never done before, on the Markets & Economy page at www.schwab.com and his video with Vice President of Trading and Derivatives, Randy Frederick, Is An Optimistic Outlook for Global Equities Warranted?, on the Insights & Ideas page. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick.

Stocks in Asia finished out the week mostly to the upside, aided by an upbeat read on Chinese manufacturing output for August, while the markets treaded cautiously ahead of a plethora of U.S. data today, headlined by the key August nonfarm payroll report. Also, conviction may have been held in check as tensions with North Korea lingered and global monetary policy and U.S. political uncertainties remained. For analysis of this backdrop, see Schwab's Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks on the International Investing page at www.schwab.com, as well as his video with Randy Frederick, Political Risk: How Should Investors Respond?, on the Insights & Ideas page.

Stocks in Japan rose modestly, despite the yen regaining some recent losses yesterday and reports showing the nation's Q2 capital spending rose at a smaller pace than anticipated and growth in manufacturing output for August was revised lower. Mainland Chinese equities gained slight ground, but shares traded in Hong Kong gave up early gains and dipped, with the markets digesting recent earnings reports in the region and the aforementioned manufacturing report, which followed yesterday's data that showed growth in activity out of the key services sector decelerated last month. Securities in Australia and India advanced, with the latter showing some resiliency in the face of late-yesterday's softer-than-expected Q2 GDP report. Markets in South Korea finished lower.

Stocks show resiliency in the face of plethora of uncertainty

The U.S. stock markets followed a two-week losing streak with a back-to-back weekly gain to close out August, showing resiliency in the face of a plethora of volatility sources, led by healthcare and technology issues. U.S. political uncertainty remained though recently resurfaced optimism of tax reform helped ease some of the anxiety. Geopolitical concerns were exacerbated by North Korea's latest missile test—this time above Japan—and lingering global trade tensions. Global monetary policy uncertainty festered as last week's Jackson Hole speeches offered little in terms of policy signals, while stubbornly low inflation was countered by stronger-than-expected U.S. Q2 GDP growth and manufacturing activity in China, the U.S., the U.K. and eurozone showing accelerated output in August to lift industrial and materials stocks.

Consumer Confidence hit a five-month high and automakers rallied on Friday to help boost the consumer discretionary sector, and overshadow negative reactions to earnings reports from Best Buy Co. Inc. (BBY $54), Finish Line Inc. (FINL $9) and Dollar General Corp. (DG $72). Adding to the puzzle, the euro hit a more than two-year high against the U.S. dollar, making the European Central Bank a bit uncomfortable, but paused as the greenback rebounded modestly amid the market resiliency and data. Treasury yields were relatively quiet on the week. Even a spike in gas prices and volatile crude oil markets in the wake of Hurricane Harvey did not detour the markets.

Although a short week, next week's economic calendar will bring a flood of key reports for the markets to digest, courtesy of July factory orders, the July trade balance, August ISM non-Manufacturing and Markit Services PMI Indexes, the Fed's Beige Book, and final Q2 productivity and labor costs.

The international economic front will also be robust with reports including: Australia—Reserve Bank of Australia monetary policy decision, Q2 GDP, retail sales and trade balance. China—Caixin PMI Services Index, trade balance, CPI, and PPI. India—trade balance. Japan—trade balance, and Q2 GDP. Eurozone—European Central Bank monetary policy decision, retail sales, and Q2 GDP, along with German factory orders, industrial production, and trade balance. U.K.—industrial/manufacturing production, trade balance, and Bank of England inflation outlook.

As noted in the latest Schwab Market Perspective: A Preview of Coming Attractions?, Volatility has ramped up a bit in the traditionally-slow final weeks of summer, which could be a preview of a bumpy fall for investors. Solid economic data and strong corporate earnings should allow the bull market to continue, but fiscal and monetary uncertainties present risks. August narrowly avoided the first loss for global stocks this year; but underlying fundamentals still look generally positive. Read more on the Markets & Economy page at www.schwab.com.

Stocks Finish Flat Following Jobs Report and Syria Strike

Charles Schwab: On the Market

Posted: 4/7/2017 4:15 PM ET

Stocks Finish Flat Following Jobs Report and Syria Strike

U.S. stocks finished Friday's trading session near the unchanged mark after battling back from early pressure following a softer-than-expected March Labor Report and overnight missile strikes by the U.S. in Syria. Treasury yields and gold advanced, while the U.S. dollar and crude oil prices also gained ground, but experienced bouts of volatility. In very light equity news, PriceSmart announced 2Q results that fell shy of the Street's expectations.

The Dow Jones Industrial Average (DJIA) moved 7 points to the downside to 20,656, the S&P 500 Index shed 2 points (0.1%) to 2,356, and the Nasdaq Composite ticked 1 point lower to 5,878. In moderate volume, 752 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.54 to $52.24 per barrel and wholesale gasoline was $0.02 higher at $1.75 per gallon. Elsewhere, the Bloomberg gold spot price increased $3.04 to $1,254.74 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 101.15. Markets were mostly lower for the week, as the DJIA was flat, the S&P 500 Index declined 0.3%, and the Nasdaq Composite shed 0.6%.

PriceSmart Inc. (PSMT $87) reported fiscal 2Q earnings-per-share (EPS) of $0.90, versus the FactSet estimate of $0.92, as revenues rose 2.0% year-over-year (y/y) to $793 million, compared to the expected $794 million. Shares traded solidly lower.

March nonfarm payroll job growth misses severely

Nonfarm payrolls (chart) rose by 98,000 jobs month-over-month (m/m) in March, compared to the Bloomberg forecast of a 180,000 increase. The rise of 235,000 seen in February was revised to a gain of 219,000 jobs. The total downward revision to the job gains in February and January was 38,000. Excluding government hiring and firing, private sector payrolls increased by 89,000, versus the forecasted gain of 170,000, after increasing by 221,000 in February, revised from the 227,000 rise that was initially reported. Professional and business services continued to show solid growth to lead the way, while retail sector employment fell and job growth in construction slowed from February's sharp increase. Weather may have had an impact as March saw a heavy snow storm in the Northeast, while February's unseasonably warm weather likely pulled some gains forward in the construction sector.

The unemployment rate fell to 4.5%—the lowest since May 2007—from 4.7%, where it was forecasted to remain, while average hourly earnings rose 0.2% m/m, matching projections and following February's upwardly revised 0.3% increase. Compared to last year, earnings were 2.7% higher, matching estimates and following the 2.8% gain in the previous month. Finally, average weekly hours remained at February's downwardly revised 34.3 rate, versus estimates of 34.4.

The data appeared to catch economists off guard, given the employment data leading up to the report, notably Wednesday's blowout figures from ADP. However, the report is likely keeping concerns about a faster-than-expected pace of Fed rate hikes in check. The March figures likely did little to calm concerns about the wide spread between "soft" and "hard" data, as discussed by Schwab’s Chief Investment Strategist Liz Ann Sonders in her article, Hard Times: Time for the Hard Data to Catch Up to the Soft Data. But as Liz Ann points out, after a "typical" weak first quarter, economic growth should accelerate and based on history, soft data is likely to retreat, while hard data is likely to accelerate. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

Consumer credit, released in the final hour of trading, showed consumer borrowing advanced by $15.2 billion during February, just topping the $15.0 billion forecast of economists polled by Bloomberg, while January's figure was adjusted higher to an increase of $10.9 billion from the originally reported $8.8 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, climbed by $12.3 billion, while revolving debt, which includes credit cards, increased by $2.9 billion.

Wholesale inventories (chart) were unadjusted at a 0.4% m/m gain for February, matching expectations, and following January's 0.2% decline. Sales rose 0.6% m/m, after January's upwardly revised 0.3% gain. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—remained at January's 1.28 months level.

Treasuries were lower despite some early strength, with the yield on the 2-year note ticking 5 basis points (bp) higher to 1.29%, the yield on the 10-year note gaining 4 bps to 2.38% and the 30-year bond rate increasing 3 bps to 3.01%. The bond and currency markets were choppy following the employment report and amid a flare-up in geopolitical concerns in the wake of last night's U.S. missile strikes in Syria, and showed little reaction to President Trump's favorable comments on his meeting with China.

Amid this backdrop, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, article, Top Five Trade Issues Investors Should Be Watching at www.schwab.com/oninternational and follow Jeff on Twitter: @jeffreykleintop. Also check out our videos by Schwab's Vice President of Trading and Derivatives, Randy Frederick and Senior Fixed Income Research Analyst, Collin Martin, CFA, titled, Fed Hiked Interest Rates, So Why Are Bond Yields Still So Low?, and Randy's and Schwab's Chief Fixed Income Strategist, Kathy Jones' discussion, Three Fed Hikes Seen in 2017: How Should Bond Investors Respond?, at www.schwab.com/insights. Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones. Finally, for our recent commentary on the political front, see Schwab’s Chief Investment Strategist Liz Ann Sonders' and Randy Frederick's video, Is Tax Reform Still On the Table? at www.schwab.com/insights.

Europe nudges higher, Asia mixed

European equities ticked higher, showing some late-day resiliency in the face of a jump in geopolitical uncertainty after the U.S. conducted missile strikes in Syria in response to a chemical attack on civilians earlier this week. The strikes fostered a relatively limited reaction for the markets, though crude oil prices briefly spiking and pared gains but extended a recent rally. The markets appeared to shrug off the much softer-than-expected U.S. labor report, as well as scrutiny on the second day of talks between the U.S. and China. Political uncertainty in the region remained as discussed by Schwab's Jeffrey Kleintop, CFA, and Randy Frederick in the videos, "Brexit" Underway: How Can Investors Prep Now That Article 50 Has Been Triggered? and Why Should the French Presidential Election Be Important to Investors? at www.schwab.com/insights. Also, check out our article, Brexit Begins: What's Next for the U.K., at www.schwab.com/insights, while Director of International Research, Michelle Gibley CFA, offers her article, Europe Votes: Could More Countries Reject the EU? at www.schwab.com/oninternational. In economic news, French industrial and manufacturing production missed expectations, while German exports unexpectedly rose and the nation's industrial production surprisingly jumped. U.K. manufacturing and industrial production both unexpectedly declined. The euro and British pound were lower versus the U.S. dollar and bond yields in the region moved to the downside.

Stocks in Asia finished mixed as the global markets reacted to a flare-up in geopolitical concerns after the U.S. launched missile strikes in Syria, while also eyeing the two-day summit between the U.S. and China. Crude oil prices spiked briefly following the U.S. military action but later pared gains amid a relatively limited reaction. Headlines regarding the start of the U.S. and China meeting lacked details but some reports suggested the talks were off to a good start. As such, see Schwab's Jeffrey Kleintop's, CFA, article, Five Reasons to Stay Invested Despite Heightened Uncertainty at www.schwab.com/oninternational. Japanese equities overcame early downside pressure as the yen pared some of its gains. Mainland Chinese stocks rose and shares in Hong Kong finished flat, with the rise in crude oil prices helping the latter recover. Oil & gas issues saw some strength to help nudge Australian securities higher. South Korean equities dipped and Indian listings continued to trim gains from a recent rally to record highs in the wake of the heightened geopolitical concerns and yesterday's raising of a non-benchmark interest rate by the Reserve Bank of India.

Stocks dip as bond rates continue slide

U.S. stocks dipped on the week as domestic and European political uncertainty lingered and the markets eyed the highly-anticipated first meeting between President Trump and his Chinese counterpart Xi. Financials led to the downside and utilities outperformed as Treasury yields resumed a slide amid a flare-up in geopolitical concerns, resurfaced uncertainty regarding tax reform, and as the minutes from the Fed's March meeting suggested the Central Bank may act sooner than expected on shrinking its bloated balance sheet. Conviction was also corralled by the growing concern about the widening divergence between "soft" and "hard" data as March auto sales figures solidly missed expectations to precede Friday's much softer-than-forecasted Labor Report, though ISM and Markit surveys of manufacturing and services sector activity both showed continued growth, with the former sector remaining firmly in expansion territory. The U.S. dollar ticked higher and gold jumped, while crude oil prices shrugged off a bearish oil inventory report to extend a recent rally and bolster the energy sector.

Next week's economic calendar will likely foster a delayed reaction as key data points, retail sales and the Consumer Price Index (CPI), will fall on Good Friday when the U.S. markets will be closed. Leading up to Friday, the docket will deliver the NFIB Small Business Optimism Index, JOLTS Job Openings, the Producer Price Index (PPI) and the preliminary University of Michigan Consumer Sentiment Index. Finally, 1Q earnings season will begin and will likely garner attention amid elevated expectations of earnings growth.

As noted in the latest Schwab Market Perspective: Working off the Froth, the recent pullback in stocks and failure of healthcare reform appears to have helped take some of the froth out of the market and correct some overly optimistic sentiment conditions. We believe this will prove to be healthy for the continuation of the bull market, with an improving economy and a still business-friendly administration supporting further gains. But potential political-induced volatility isn't limited to the United States, as the official Brexit process started. A UK recession doesn't appear to be in the cards at this point, but risks have risen; while U.S. recession risk remains quite low. Read more at www.schwab.com/marketinsight.

Reports on next week's international front that deserve a mention include: Australia—consumer confidence and employment change. China—lending statistics, CPI and PPI, and trade balance. India—CPI, trade balance and industrial production. Japan—machine orders and trade balance. Eurozone—investor confidence, industrial production, along with German CPI and investor sentiment. U.K.—inflation statistics and employment change.

Financial Review

December Jobs Report

Sinclair Noe — January 6, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW + 64 = 19,963 (intraday record 19,999.63)
SPX + 7 = 2276
NAS + 33 = 5521 (another record close)
RUT – 4 = 1367
10 Y + .05 = 2.42%
OIL – .11 = 53.66
GOLD – 8.40 = 1172.80

Today is a Jobs Report Friday. The US economy added 156,000 jobs in December; this was below estimates of around 170,000. The unemployment rate edged up to 4.7% from 4.6% as more people entered the labor force in search of work.

Employers hired 19,000 more workers than previously reported in October and November. The U.S. has created more than 2 million jobs in each year since 2011, though hiring has slowed over the last two years. Employment growth in 2016 averaged 180,000 jobs per month, down from an average gain of 229,000 per month in 2015.

The slowdown in job growth is consistent with a labor market that is near full employment. The latest payrolls tally brought the advance for 2016 to 2.16 million, after a gain of about 2.7 million in 2015.

The steady gains in employment have finally started to push worker pay higher. Average hourly wages jumped 0.4% to $26 in December. Hourly pay increased 2.9% from December 2015 to December 2016, marking the fastest 12-month increase since a recovery that began in mid-2009.

Hours worked were unchanged at 34.3 last month. December’s job gains were broad, education and health services employment rose 70,000, the biggest increase since February. Leisure and hospitality added 24,000. Manufacturing payrolls gained 17,000 after declining for four straight months.

Transportation added 14,700 jobs. Financial activities gained 13,000 jobs. Retail sector employment rose 6,300 after increasing 19,500 in November, although holiday hires were down significantly from 2015 as many retail outlets turned cautious. Government employment increased 12,000 in December. Construction payrolls fell 3,000 in December after three consecutive months of increases.

Among the details of the December report, the participation rate, which shows the share of working-age people in the labor force, increased to 62.7 percent, from 62.6 percent. The participation rate has fallen significantly since its high around the year 2000. The root cause of declining participation remains disputed, with demographics and discouraged workers cited as some of the possible explanations.

In 2017, the labor-force participation number will likely remain a major focus. About half of the decline reflects Baby Boomers moving into retirement; the other half reflects prime-age workers, many of whom have just abandoned their hopes for a job.

The U-6 unemployment rate dropped one-tenth of a point to 9.2%; U-6 is a broader measure that includes unemployed, under-employed or people working part-time who would like to be full-time, and discouraged workers who have stopped looking for jobs. The U-3 rate has in the past few months returned to the pre-recession levels that economists consider full employment.

The U-6 has seen significant gains in recent months, but remains higher than before the recession. When we hear talk about the economy being near full employment, consider the U-6 rate and realize there is still plenty of slack. The BLS reports 1.7 million people are marginally attached – looking for work; 5.6 million are employed part-time for economic reasons.

Janet Yellen has said the economy only needs to add about 100,000 new jobs per month to maintain current levels of employment and absorb new workers into the labor force. Trump promised to create 25 million new jobs under his administration. The math doesn’t work. To add 25 million jobs, would mean dragging people out of retirement and putting school kids to work, and the unemployment rate would be a negative number. It won’t happen. But there is room for continued job growth in 2017.

This is the last full jobs report of the Obama administration. Since January 2009, the economy has added 11.3 million jobs. This includes a decrease of 354,000 government workers, so private payroll growth has been slightly higher.

The Obama administration loves to tout that the economy has added jobs every month for the past 75 months, the longest streak on record and much higher than the previous record of 48 between 1986 and 1990. By comparison, the Clinton administration added 22.9 million total jobs; Reagan added 15.9 million; Johnson added 12 million nonfarm payrolls.

So, on jobs, Obama tops Carter, Nixon, Truman, Eisenhower, Kennedy, Bush I and Bush II, and Ford – in that order. Considering that the US lost more than 700,000 jobs in each of the first three months of Obama’s presidency — including 791,000 jobs lost in January 2009 — the comeback for the US labor market has been impressive by most counts. As of December 2016, total non-farm employment exceeded its pre-recession peak by 6.9 million jobs.

As more Americans find work and the labor market tightens, you can expect wages to rise because of the competition among employers to attract the remaining qualified job candidates. In recent months, wages have again gained ground, up 2.9% in the past 12 months, compared to inflation running around 1.5% – so we have real gains.

Before the crash, the U.S. was cruising along with annual wages rising at rates between 3 and 4 percent and those rates are characteristic of other economic boom times over the past 30 or so years. So things are still not quite as good as they were—and a lot of the wage growth that did happen in the first several years of the recovery was in fact eaten up by inflation.

So, if there is slack in the labor force, why are we seeing wages start to pick up?

Part of the answer is basic supply and demand. Part of the answer is demographics and skill sets; many younger workers stayed in school during the downturn and now they are entering the workforce well-trained and demanding decent wages. Part of the answer might be recent legal changes affecting wages.

A few weeks ago, over four million Americans were poised to benefit from new overtime regulations at the start of the new year. The new rule – which would require time-and-a-half pay for those working more than 40 hours a week – was part of an executive order signed by President Obama in 2016. The order would have effectively doubled the salary threshold for mandatory overtime pay from $23,660 to $47,476 – forcing employers to either pay many more workers overtime, or bump their salaries beyond the reach of the threshold.

That executive order was overturned in November by a federal judge in Texas, but it is possible that some workers got a raise before that ruling. Those raises might not last; there are already reports that some employers are clawing back those raises. And there is a strong probability the executive order will be rescinded under President-elect Trump.

Some employers will choose to follow-through with existing salary hikes: Walmart says it plans to keep the pay raises it instituted for entry-level manager salaries. In September, the retailer bumped pay for the position to $48,500 up from $45,000 to avoid the federal-overtime threshold.

Also, many minimum wage workers are seeing an increase in their paychecks. According to data collected by the National Employment Law Project, a workers-rights advocacy group, 19 states and 21 local jurisdictions raised their minimum wages at the start of 2017. Many of those increases were small cost-of-living adjustments, but some of them were dramatic.

Arizona, where voters approved a wage hike on Election Day, raised its minimum wage by nearly $2 an hour, to $10 from $8.05. Maine’s minimum wage jumped to $9 an hour from $7.50. Washington state and Massachusetts both raised their minimums to $11 an hour. In total, six states plus the District of Columbia now have minimum wages of at least $10 an hour. (Oregon will join the club later this year.)

Most of those increases in minimum wage did not show up in the December jobs report, but we should see some impact on the January 2017 report in one month. The big question is whether these aggressive increases in minimum wage will be job killers or poverty preventers.

Most studies have found that wage increases have at most a small impact on total employment – that is, there is little evidence for the claim that the minimum wage is a major job-killer. But over the next few months we will see the minimum wage experiment unfold in real-time.

Part of the explanation for rising wages might also be found in the changing landscape of the labor market. According to a paper published last month through the US National Bureau of Economic Research, routine, low-paying, manual labor jobs are disappearing.

Routine occupations employed about 40 per cent of the working-age population in the US in 1979. That figure was stable for about a decade and then declined steadily to reach about 31 per cent in 2014. Many of those routine jobs have been automated or will be. For workers, that means they either accept low paying jobs in other areas, or train for higher-paying jobs, or drop out of the labor market.

This might go a long way to explaining the historically low labor force participation rate, and the stubbornly high U-6 unemployment rate, and the sudden resurgence in wages. The challenge for the future will be solving the mismatch between the types of jobs people used to have and the types of jobs the economy is currently creating.

In the immediate aftermath of the jobs report, the yield on the 10-year Treasury note rose. The dollar halted a two-day slide. Gold stayed lower, while emerging-market equities were little changed. Oil edged above $54 a barrel before sinking lower. The report did little to alter trader expectations on the Federal Reserve’s path for interest-rate increases.